Why Houston Should Care About Public Pension Reform in Rhode Island

By Elena FarahUniversity of Houston PhD candidate in Political ScienceHobby Center for Public Policy

Last year Rhode Island enacted a most dramatic public pension system overhaul nationwide. As Houston attempts to reign in its own legacy pension troubles, it is worth examining if key components of the reform process in the Ocean State might also apply in the Lone Star State.

It might take a Democrat to pioneer change.

Both the public and union leaders are less likely to discount reform efforts initiated by Democrats as a “partisan attack,” giving credibility to pragmatic Democrats to lead on pension reform and build trust with public employees and their unions to achieve pension sustainability over multiple generations of pension beneficiaries and taxpayers. Pension reform in Rhode Island was pioneered by a Democratic state treasurer, Gina Raimondo, and written into law by a predominantly Democratic state legislature.

While Houston boasts non-partisan elections, mediating the impact of party affiliation at the local level, party identification is prominent in the highly partisan state elections. State politicians are key players in local pension policy, since state statutes govern the three pension funds, reserving only limited flexibility at the local level for the municipal and police funds (but not the firefighter fund) through respective meet-and-confer agreements.

Without support at the state level, Houston is unable to fix its structurally unsound pension system with a total unfunded liability of over $2.35 billion. In addition, The Texas Pension Review Board reports a total unfunded liability of over $42.6 billion for all pension funds in the state. Being a robust regional hub, Houston may be relied upon to generate additional tax revenue to fund insolvent pensions in other less economically fortunate cities.

Houston’s situation is just a tip of the iceberg in a nationwide pension crisis exacerbated by demographic trends of an increased longevity of retirees and fewer active payers.

All parties affected by pension overhaul need to be represented during all stages of the process, especially the public.

Often labeled as a “zero-sum” conflict, a system of sustainable, responsible public pensions is in the long-term interest of both public employees and taxpayers.

Sustainable pensions promise reasonable and equitable benefits across all tiers of employees and over multiple generations of beneficiaries. They are transparent and consistently funded to ensure intergenerational equity for both beneficiaries and taxpayers.

Pension reform often implies significant loss of benefits for recently hired and future employees, while fully preserving legacy pensions. But future beneficiaries require representation, much like future generations of users of a natural resource need to be taken into consideration to prevent plunder by current users.

While state and local politicians are elected with the mandate to represent a broad constituency with multiple interests, it is often difficult for them to ignore the lobbying efforts of well-organized groups who have a stake in the status quo, such as professional unions. Thus direct involvement of the public is essential at all stages of the process.

If left unresolved, large pension expenditures divert resources from other essential government functions. Taxpayers may then “vote with their feet,” leading to a vicious cycle of financial distress, jeopardizing sustainability of public pensions. When the state-appointed receiver filed for bankruptcy of the town of Central Falls, Rhode Island, demoting the mayor and city council president to the role of advisers, nulling collective bargaining agreements and laying off many public employees, many retired police officers and firefighters saw their pensions cut in half.

The new pension law in Rhode Island shifted all workers from defined benefit pensions (an annuity based on employee age, years of service and salary) to hybrid plans (an annuity and a defined contribution component similar to private 401(K) plans); increased retirement age to 67 from 62 for all workers; and temporarily suspended cost-of-living adjustments.

Rhode Island also lowered the discount rate used to compute pension liabilities to 7.5 percent from a prior 8.25 percent. A higher discount rate deflates pension liabilities on paper without necessarily making them cheaper to pay when due, confronting governments with unplanned expenditures, often at the worst time in the economic cycle when other budgetary pressures are also on the rise.

By contrast, recent pension reforms in Houston targeted only selected pension funds and applied exclusively to new employees, leaving legacy pensions unreformed, unfunded and unresolved. The discount rate used to calculate pension liabilities in Houston remains at 8.5 percent, which, while within the range for comparable systems in the nation, is above the median of 8 percent for a large sample of peers (Novy-Marx and Rauh, 2010).

It might take a crisis to focus public attention.

A serious crisis – an insolvent pension fund, taxpayer flight from a city which continues to tax but fails to deliver services, or a municipal bankruptcy – may be necessary to focus public attention on the extent to which many legacy systems are broken and to give politicians at the state and local level courage to fix something they should have done a long time ago. For the sake of pension beneficiaries and taxpayers alike, we urge politicians to be proactive rather than reactive.

I’ll be talking about public pensions in coming blogs, but let me hear from you.

6 Responses

The figures showing a downward spiral of liabilitoes are based on numbers derived from the stock market right after the crash. Since then, each of the three pension systems has had double digit returns and shown great improvement. If the city would just pay what it owed for a few years, all of them would be in the black without reducing services.

You are a state agency or university employee and a member of the Texas State Employees Union
Both ERS and TRS are more than 80% fully funded, which qualifies them as sound pension funds
According to a study done by the Legislative Budget Board, it would cost taxpayers more to convert state employees to defined contribution plans
State employees, along with everyone else, deserve a secure retirement that is not subject to the ups and downs of the stock market
The average state employee salary is $38,000 a year and there have been no cost of living raises for state agency employees since 2008 university employees since 2005
State retirees don’t get automatic cost-of-living increases to their annuities and ERS retirees haven’t seen one since 2001
We need to protect state employee defined benefit plans!

Hasn’t anyone learned anything from what happened with Enron? Their employees had retirement funds locked up in 401ks and not only due to Enron’s irresponsible business practices but also due to the volatility of the market they will never see that money. Why would anyone want to put their money in a sinkhole?

I am a state agency employee and a member of the Texas State Employees Union
Both ERS and TRS are more than 80% fully funded, which qualifies them as sound pension funds
According to a study done by the Legislative Budget Board, it would cost taxpayers more to convert state employees to defined contribution plans
State employees, along with everyone else, deserve a secure retirement that is not subject to the ups and downs of the stock market
The average state employee salary is $38,000 a year and there have been no cost of living raises for state agency employees since 2008 university employees since 2005
State retirees don’t get automatic cost-of-living increases to their annuities and ERS retirees haven’t seen one since 2001
So please get your facts straight before you put in print your false “Right Wing” propoganda. All articles like this accomplish is to diminish worker’s rights and further line the Repbulican’s pockets.